Question

Dorsey Company manufactures three products from a common input in a joint processing operation. Joint processing costs up to the split-off point total $385,000 per quarter. For financial reporting purposes, the company allocates these costs to the joint products on the basis of their relative sales value at the split-off point. Unit selling prices and total output at the split-off point are as follows:

Product	Selling Price			Quarterly Output
A	$	27.00	per pound		14,400	pounds
B	$	21.00	per pound		22,400	pounds
C	$	33.00	per gallon		5,600	gallons

Each product can be processed further after the split-off point. Additional processing requires no special facilities. The additional processing costs (per quarter) and unit selling prices after further processing are given below:

Product	Additional Processing Costs		Selling Price
A	$	89,220	$	32.80	per pound
B	$	129,170	$	27.80	per pound
C	$	60,160	$	41.80	per gallon

Required:

1. What is the financial advantage (disadvantage) of further processing each of the three products beyond the split-off point?

2. Based on your analysis in requirement 1, which product or products should be sold at the split-off point and which product or products should be processed further?

Answer 1

Incremental analysis :

	Product A	Product B	Product C
Sale price after further processing	32.80	27.80	41.80
Sale price at split off point	27	21	33
Incremental sale price	5.80	6.80	8.80
Quantity	14400	22400	5600
Incremental sale revenue	83520	152320	49280
Incremental cost	-89220	-129170	-60160
Incremental profit (loss)	-5700	23150	-10880

2) Analysis :

	Product A	Product B	Product C
Sale at split off poing	Yes	No	Yes
Sale after further processing	No	Yes	No